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Whole Foods Beats by a Penny

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Whole Foods Market, Inc.’s first-quarter fiscal 2013 earnings of 78 cents a share came a penny ahead of the Zacks Consensus Estimate, and surged 20% from 65 cents earned in the prior-year quarter as shoppers flocked to the grocery chain. However, the Austin, Texas-based company reiterated its earnings per share projection.

Management hinted that the rate of growth in earnings per share in the remaining part of the fiscal year would not be at a similar level as that of the first quarter as gross margin would remain under pressure, primarily in the second and third quarters. This is due to tough year-over-year comparison, along with competitive pricing strategy to gain market share against other supermarket chains.

Let’s Unveil the Picture

Whole Foods, a leading natural and organic foods supermarket, sustained its top-line growth momentum with revenue climbing 13.7% to $3,856 million in the quarter, but fell short of the Zacks Consensus Estimate of $3,875 million.

Effective inventory management and improved store-level performance have helped the company sustain the downturn and achieve improved sales and profit. Whole Foods has been revamping its pricing strategy and concentrating more on value offerings, while maintaining healthy margins. In the last 5 fiscal years, gross margin has been in the range of 34% to 35.5%.

Whole Foods said that comparable-store sales rose 7.2% in the quarter, down from 8.7% in the prior-year quarter and from 8.5% in the previous quarter. For the first 3 weeks of the second quarter, comparable-store sales jumped 6.4%.

The company also notified that identical-store sales climbed 7.1% in the quarter compared with 8.2% in the year-ago quarter and 8.3% in the preceding quarter. For the first 3 weeks of the second quarter, identical-store sales jumped 6.1%.

It seems that comparable and identical store sales growth trend is softening. Consequently, Whole Foods narrowed its sales outlook.

Whole Foods indicated that gross profit rose 14.4% to $1,348 million, whereas gross margin grew 22 basis points to 35%. Store contribution soared 20.2% to $369 million. As a percentage of sales, store contribution increased 52 basis points to 9.6%.

Adjusted EBITDA for the quarter soared 18.5% to $365 million, whereas adjusted EBITDA margin expanded 40 basis points to 9.5%. Operating income for the quarter jumped 23.7% to $235 million, whereas operating margin increased 50 basis points to 6.1%.

Stores Update

Whole Foods currently operates 345 stores. The company opened 10 outlets during the first quarter of fiscal 2013. So far in the second quarter, the company has opened 1 store, and plans to open 5 more stores. The company also acquired leases of 6 outlets from Johnnie's Foodmaster, thereby increasing its count to 26 stores in the Greater Boston area.

The company plans to open 32 to 34 stores in fiscal 2013 and 33 to 38 stores in fiscal 2014. The company had opened 25 stores in fiscal 2012. The company believes that there exists room for 1,000 stores in the long run, and sees expansion opportunity in Canada and the United Kingdom.

Other Financial Details

Whole Foods ended the quarter with cash and cash equivalents of $152 million, total long-term capital lease obligations of $25 million, and shareholders’ equity of $3,543 million.

During the quarter, Whole Foods generated cash flow from operations of $303 million and incurred capital expenditures of $155 million, resulting in free cash flow of $148 million. The company paid $397 million in dividends and bought back $26 million of shares.

The company has been utilizing its cash flows for opening new stores, paying down debt and returning cash to shareholders through dividends and share repurchases.

Strolling through Guidance

Whole Foods now projects an escalation of 10% to 11% in total sales for fiscal 2013 on the back of an expected 6.6% to 8% rise in comparable-store sales and 6.3% to 7.7% growth in identical-store sales.

Earlier, management had forecasted 10% to 12% growth in sales, 6.5% to 8.5% rise in comparable-store sales and 6% to 8% jump in identical-store sales.

Management maintained its EBITDA guidance of $1.18 billion to $1.20 billion, and operating margin projection of 6.6% to 6.7%. The company continues to anticipate capital expenditures between $565 million and $615 million.

Management reiterated its earnings forecast of $2.83 to $2.87 per share, portraying a year-over-year jump of 12% to 14%. Analysts polled by Zacks, estimate fiscal 2013 earnings at $2.90.

Zacks Rank for Whole Foods

Currently, Whole Foods carries a Zacks Rank #3 (Hold). However, there are certain other stocks that warrant a look, such as Flowers Foods, Inc. (FLO - Free Report) and J&J Snack Foods Corp. (JJSF - Free Report) , both of which hold a Zacks Rank #1 (Strong Buy) and are expected to continue with their upbeat performances. Another stock that should be merited is The Hershey Company (HSY - Free Report) , which holds a Zacks Rank #2 (Buy).

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